As regulatory developments in the cryptocurrency space have largely concluded, Bitcoin broke above $31,000, and the broader crypto market is gradually shifting its focus back to U.S. interest rate policy. Last week, investors awaited the release of the employment report, and the much stronger-than-expected job gains caused Bitcoin to retreat to $29,000 before slowly recovering to above $30,000. Let us now discuss how high interest rates and policy changes are affecting the cryptocurrency market this week.
First, the EDX theme saw its final wave of momentum, with LTC and BCH attracting strong capital inflows, both posting weekly gains that outperformed most other cryptocurrencies. In addition, meme coins and DeFi projects also delivered impressive gains last week. Notably, MakerDAO surged 45% over the week, with its token price skyrocketing from $640 to $940, drawing significant market attention. The reason behind this surge is that MakerDAO published its latest annual profit results, reaching $70 million, and announced further Maker buybacks as well as the deployment of Spark Protocol onto additional mainnet blockchains. Additionally, the protocol raised its DSR deposit rate to 3.49%, attracting substantial capital inflows. The ability to offer such a high deposit rate stems from MakerDAO taking its $2 billion USDC stablecoin reserves and purchasing ultra-short-term U.S. Treasury bonds, which yield approximately 5%, matching the benchmark rate set by the Federal Reserve. In other words, MakerDAO allocates 3.49% of that 5% yield to USDC depositors, while USDC is redeemed for U.S. dollars to purchase Treasury bonds in exchange for returns. If users require liquidity in cash, they can use their deposited USDC as collateral to mint DAI, thereby obtaining liquidity equivalent to a stablecoin. However, the party most negatively affected by this strategy is Circle, as MakerDAO is effectively extracting dollar reserves from USDC. In today’s high-interest-rate environment, the U.S. dollar is a risk-free asset capable of generating a direct 5% yield. Circle’s original stablecoin product does not pay interest, allowing it to retain 100% of the dollar interest income. Now MakerDAO has stepped in, leveraging the advantages of the DAI stablecoin. Under the premise that users agree to swap for DAI, MakerDAO distributes 60% of the interest income to users to attract deposits, effectively siphoning off USDC’s dollar reserves. We also anticipate that an increasing number of USDC users will be drawn to the 3.49% APY, further accelerating this shift.The 49% interest rate is attracting, and more USDC will be placed into the Maker service. Circle will lose more dollar yield opportunities. Assuming Circle takes no action, this business model is expected to generate greater returns for Maker. We are optimistic about its development. Under normal circumstances, Circle’s massive reserves could provide substantial returns in a high-interest-rate environment. Even if interest rates decline in the future, bond prices will rise accordingly. Launching this service at the end of the U.S. rate-hike cycle carries relatively low risk and significant potential rewards. Last week, the market also saw a strong U.S. labor market, and the Fed is expected to have more room to raise rates, triggering considerable negative market sentiment. Not only did U.S. stocks suffer, but the crypto market was also affected. Let us now discuss the U.S. employment report and rate hike expectations. Although most believe the strong U.S. employment report and the tight labor market will continue to push inflation higher, we think otherwise. Assuming this week’s price index does not come in particularly low, the Fed will likely adopt more aggressive rate hike measures. However, we believe U.S. employment is only temporarily resilient. The U.S. economy could still enter a recession in the fourth quarter, and the Fed may consider cutting rates in the first quarter of next year. Let us discuss some details of the employment report. A. July 03: Several fund companies submitted amendments to their Bitcoin spot ETF applications. After the SEC stated that a Bitcoin spot ETF was not suitable for listing, several companies that had applied for a Bitcoin spot ETF reportedly changed their application content, including Fidelity, Invesco, 21Shares, WisdomTree, and VanEck. The amendments included designating Coinbase as the custodian and explaining how to prevent market manipulation and protect investor rights. However, such supplementary content is far from sufficient for SEC approval. The Wall Street Journal, citing sources, reported that the SEC believes the Bitcoin market remains insufficiently transparent and robust. Even hiring Coinbase as a custodian does not fundamentally resolve the market manipulation concerns that the SEC has. Moreover, the SEC and Coinbase are already involved in litigation, so the Coinbase solution is not enough to convince the SEC. As of now, we believe the Bitcoin spot ETF narrative has largely played out. The proposed amendments from these fund companies are clearly insufficient to persuade the SEC. This latest amendment is merely a final struggle. The market does not expect the spot ETF to be approved, leaving Bitcoin price consolidating in the $30,000 range without rising despite the PCE price index coming in below expectations.
Related News: Coinbase Embraces Regulation! Fidelity, Invesco and 5 Other Firms Reapply for Bitcoin Spot ETF
B. July 4: BAYC Bored Ape NFT Series Price Plunges 90% Twitter user Will Clemente calculated that the floor price of the BAYC Bored Ape NFT series has dropped over 90% from its all-time high. The cheapest price on OpenSea has now fallen to 30 ETH, approximately $58,000. While the price still appears high, this is the lowest level in the past year. The series has dropped more than 23% over the past few days, and the current NFT market trading sentiment is poor. At present, BAYC remains the most popular digital asset brand in the NFT market. This decline is not limited to BAYC; another brand, Azuki, also suffered a severe blow to user confidence due to the new product 2.0 incident, with prices dropping over 63% over the weekend. Other well-known NFT brands such as Mutant Ape Yacht Club, DeGods, and Elemental have all fallen 15% to 20% in the past 24 hours. Although the cryptocurrency market is gradually climbing upward, the NFT market has taken a sharp downturn due to community disputes. Investors are selling NFTs in exchange for ETH, causing funds to flow from NFTs into the crypto market. The extent of the NFT decline is also difficult to estimate, as investors cannot determine how low NFT floor prices can fall. More and more NFTs are becoming low-liquidity assets with quoted prices but no buyers. Related News: NFT Royalty Income Continues to Hit Lows! Bored Ape and Azuki Also in Bad Shape? C. July 7: ADP Report Shows Employment Market Remains Resilient, Strengthening Fed Rate Hike Sentiment Unlike the official statistics from the Department of Labor, ADP is a private payroll processing company that provides integrated online human resources services to businesses. It publishes its own survey data every month, covering approximately 25 million survey samples. The latest June results show that U.S. private companies added 497,000 jobs, mostly in customer-facing services, tourism, and healthcare, delivering much stronger-than-expected employment data. It is worth noting that manufacturing, information technology, financial services, and business services saw job reductions, with a decrease of about 100,000 jobs. This data is consistent with the weak PMI manufacturing sentiment and the major layoffs in software and finance that we have observed. The U.S. economy is currently supported by the strongly recovering travel and restaurant industries, and the resulting consumer momentum allows the U.S. economy to perform well even in a high-interest-rate environment.The above data once pushed Bitcoin below $30,000, and U.S. stocks were sold off by investors worried about Fed rate hikes. After all, a strong job market allows the Fed more room to raise rates, reserving ammunition for future rate cuts. The odds of a soft landing are gradually rising, but we believe that the tourism recovery will gradually fade in the second half of the year. Revenge travel may last until after the Christmas holiday at the end of this year, and will return to normal next year. By then, the high-interest-rate effect may well push the U.S. into a recession, so rate cuts could be seen in the second half of next year.
Related News: U.S. June ADP employment figures doubled expectations, and Bitcoin price fell below $30,000 again. Since the latest ADP employment report and Department of Labor data both show that U.S. employment is stronger than expected, this will strengthen private consumption momentum and may push prices up, causing U.S. stock investors to worry that the Fed will raise rates further to fight inflation. When the employment report was released, Bitcoin price reacted immediately, falling from $31,000 to $29,000. The next day, Bitcoin surged past $30,000. Even though rate-hike pressure had infected market investors, coupled with the pullback pressure after U.S. stocks had risen significantly, leading to a larger correction in U.S. equities, the crypto market had not previously kept pace with U.S. tech stocks, so its overall performance was relatively resilient. The rate-hike sentiment did not cause much negative impact on the crypto market. However, given the current economic conditions, the Fed does indeed still have the capacity to continue raising rates. According to FOMC rate futures, the probability of a 25-basis-point rate hike in July has reached 95%. The benchmark interest rate is expected to reach 5.4% this year. Meanwhile, U.S. Treasury yields have also reacted: the two-year Treasury yield climbed to 4.9%, while the 10-year yield climbed to 4%, meaning that U.S. interest rates will be much higher than the market previously expected. However, it is worth noting that the market is betting on only one more 25-basis-point hike this year, rather than the Fed’s statement of two more rate hikes, each by 25 basis points. Trader expectations remain relatively optimistic, and they do not believe that the Fed will raise rates by 50 basis points as previously stated to bring the benchmark rate to 5.6%. Their expectations are actually quite rational. If we carefully dissect the contents of the ADP employment report, we will find that the U.S. added 49.The 70,000 new jobs are all in the tourism and hospitality sectors, including transportation, travel, food and beverage, and retail. This reflects a strong post-pandemic recovery in travel and experience-based consumption, coupled with a significant reduction in tourism spending during the pandemic. The entire industry is currently experiencing revenge spending, and the massive demand for service labor is propping up the U.S. job market. This is also what most people are referring to as “blue-collar labor shortage, white-collar unemployment.”
Looking at the other side of the data, job opportunities in finance, information, and business professional services have decreased by 100,000. This confirms the ongoing wave of layoffs in tech companies and banks this year. What does this mean? The current strength of the U.S. job market is likely temporary. Once the Christmas holiday season ends, the revenge travel wave may come to an end, as those who wanted to travel abroad have already done so. At that point, the job market will return to normal, and the tourism and hospitality industry may begin laying off workers due to overexpansion of labor and market contraction. The U.S. could then experience another wave of unemployment. When the Fed sees this wave of unemployment, it may begin considering rate cuts as early as the first quarter of next year. We estimate that the unemployment rate may start to spike by the end of this year, and by the first quarter of next year, we may observe a continuous rise in unemployment. At that point, the probability of rate cuts will be very high. This is why traders remain optimistic about the current pace of rate hikes, with most still believing that there will only be one rate hike this year. The reason is that the U.S. could potentially enter a recession as early as the fourth quarter of this year, and the current employment boom is likely a temporary illusion. After determining the timing of rate cuts, the potential returns for cryptocurrency could be considerable. Looking at Bitcoin’s price, no matter how much negative news there is, its price has shown high resilience in the $30,000 range. If the U.S. begins cutting rates and easing in the first quarter of 2024, the entire cryptocurrency market is likely to benefit, just as it drove prices up in 2020. To return to a true bull market, we conservatively believe that after Bitcoin’s halving in 2025, there will be a better opportunity. In summary, the crypto market will still experience short-term headwinds, but the long-term outlook is very optimistic. Disclaimer: This article only represents the author’s personal views and opinions, and does not represent the views or positions of this platform. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and trades. The author and this platform shall not bear any responsibility for direct or indirect losses arising from investors’ trading. MICA Research content has been simultaneously published on Substack. To avoid missing the latest information, please click here to subscribe. Weekly reports and daily market findings will be sent to you via email.Disclaimer: This article is provided for market information purposes only. All content and viewpoints are for reference only and do not constitute investment advice. They do not represent the views or positions of this website. Investors should make their own decisions and transactions. The author and this website shall not bear any responsibility for direct or indirect losses arising from investors’ transactions.
